Hello, my name is Jim Tompkins and I am the CEO of Tompkins Associates and Tompkins International. I'm pleased to be with you today to present our fourth part of our third series of the Global Supply Chain Podcast.
In this third series on the topic of supply chain cost reduction, we began with the overall strategy behind supply chain cost reduction, and then covered supply chain cost reduction via Asian sourcing and then via transportation cost reduction.
Today, we turn our attention to distribution cost reduction. And to help us out here, I am pleased to welcome back the Tompkins thought leader on distribution cost reduction, Brian Hudock.
Brian, as a partner in the Tompkins distribution operations group, which has completed over 3,000 distribution-related projects, you have unique insight into leading distribution operations practices. Leveraging this insight to develop real, proven solutions for your distribution clients is one of the many advantages you provide to organizations on a daily basis.
What would be your input to our listeners today on how to establish a roadmap to begin realizing distribution cost reductions immediately?
Brian:
Well, Jim, first I want to thank you for asking such an open ended question. Distribution Operations is a topic I am truly passionate about. However, I will do my best to be brief and to put a boundary around the types of cost reductions that can be achieved in almost all distribution operations. I will focus on those that are within the four walls of the DC, excluding inbound and outbound transportation.
So, in general, the best practice is to simply focus on the cost centers. Not only the cost centers everyone always thinks about, including space and labor, but also materials, energy, and equipment.
Jim:
Brian, I know it's a big playing field, but I'm sure you'll be able to condense it for our audience. So let's start with the first category: space. What cost reduction can be achieved in the category of space?
Brian:
Space, and how well it is utilized, affects total cost, including off-site storage, shuttle transportation costs, double handling of materials as they are being moved off-site and often back on-site, storage labor efficiency, replenishment, and product picking within the DC. Improving space utilization through consolidation is a good first step. Having active product under one roof is the goal.
In order to do this, the steps include: analyzing inventory policies, reviewing storage methods, and implementing facility layout improvements to reduce, or better yet eliminate off-site storage requirements and/or the use of storage trailers. Properly done, this will also reduce congestion in the existing facility, reduce your operating expenses by eliminating obsolete inventory; as well as in addition, adjusting facility layouts to fit the present storage profile, will facilitate consolidating inventory into higher density single-facility storage.
For those leasing space, consider also renegotiating lease agreements accordingly to generate additional savings in this tough market environment.
Jim:
Now, looking at facility improvements in particular, can you elaborate on what some of these improvements might include?
Brian:
Well, Jim, facility product storage requirements often are initially established based upon a set of product mix assumptions; and over time those assumptions become less and less valid and the type of storage, storage location sizes and equipment mix become sub-optimal. Understanding the present product mix and future mix are critical to redesigning the layout, material flow and storage mix.
Once this is done, consideration of higher density storage, such as narrow aisle, deep lane storage, reducing general location opening sizes, adding levels to storage, creating partial locations, all become part of the redesign equation. There are a lot of new technologies available to maximize the cube utilization in a building, which is surprising only around 25% of the total facility cubic space in most operations.
Applying best practices for storage and equipment is critical to improving storage capacity in any building.
Jim:
Brian, you mention best practices for storage and equipment, what are some of the best practices for managing labor?
Brian:
There are numerous best practices to eliminate unproductive labor and fully leverage the talent you have on staff. When you look at labor, there are two areas to consider: direct labor and indirect labor. Direct labor is actual work being done and direct labor inefficiency results from two typical sources: too many touches and excessive travel.
By conducting an in-depth analysis of the present processes, product touches, product moves, system entries, confirmations, and hand-offs to identify repetitious and non-value added steps, we typically find significant unproductive steps in DC operations from those that are fully manual to those that are highly automated.
Similarly, a storage and process flow area diagram along with a detailed zone and product slotting analysis will identify and help reduce labor spent traveling during all material handling process steps and focus labor on accomplishing productive work. Updating all processes and subjecting them to a constant revision and streamlining will continuously minimize excessive non-value added activities, motions, and movements.
Not doing so will allow them to creep back into your operations. Also, a focus on reducing errors is required. Errors often take four times as long to correct as it would have to do it right the first time. Reducing error management and correction labor through performance tracking and proper training can have a major impact. It is always a best practice to do it right the first time.
Jim:
You also mentioned indirect labor. How do you improve inactive labor?
Brian:
A great question, as idle labor is a major problem in many operations, however, what percent of total labor time is indirect labor is often unknown. The best practice to reduce unproductive indirect labor is by implementing, tracking and reporting performance metrics.
Each day, idle time caused by non-scheduled work, unbalanced work areas, and end of shift pushes, creates not only lost time, but often increases overtime and temporary labor costs. You must manage costs and efficiency on both average and peak days by understanding how, where and when work generally occurs, as well as keeping staff flexible and cross-trained, and by adhering to firm order cut-offs.
If you maintain labor performance by measuring it and establishing performance goals, you will plan your staffing better and eliminate the just-in-case/unproductive staffing.
Jim:
Brian, labor and space are always thought of as the primary areas for cost reduction in operations, but are there other areas that offer significant cost reduction potential?
Brian:
In a distribution center, there are significant amounts of materials used for packaging and for product handling. These are often treated as fixed expenses versus a cost reduction opportunity. Reducing material usage and waste can generate significant expense savings.
This can be as simple as cash generating recycling all the way to a full scale sustainability program to reduce waste generation in order to reduce waste removal costs, waste handling labor, material space requirements, and new material costs. Fully considering the best use and possible re-use of cartons, dunnage, pallets, and packaging materials, as well as reviewing the packaging process will identify excesses and generally reduce packaging and shipping supply costs.
An added benefit to reducing waste is you may reduce waste handling labor and waste removal and disposal costs, along with improving your company's environmental stewardship.
Jim:
In most distribution centers, there's a significant amount of equipment. What are the areas of cost reduction around material handling equipment?
Brian:
One of the benefits of direct labor improvement is you will improve fork truck utilization and may reduce overall equipment requirements on operator-dependent material handling equipment. In order to improve equipment performance, the first step is to analyze the condition and usage of fork trucks, conveyors, storage and other operating equipment against current and future requirements to identify artificial bottlenecks to performance.
Then, over time, adapt equipment to changes in work processes to improve efficiency. In addition, much like lighting, conveyor systems and related material handling equipment, run continuously and burn significant energy in most operations. An analysis of the types of equipment in use, the efficiency of motors, maintenance and condition, along with a review of energy management systems and newer equipment technologies, which are designed to operate equipment only when needed, can generate 10-30% energy use reduction in most operations.
Choices, such as electric versus fuel based trucks, including selecting the type of fuel or electric battery type based upon load and use must be built into future equipment planning. Of course proper maintenance of all equipment to keep it performing as designed is critical to cost reduction and minimized down-time in DC operations.
Jim:
Brian, are there any other thoughts you have about this subject?
Brian:
Volume and growth can obscure a multitude of inefficiencies in most distribution operations. With nonstop top-line growth and focus on timely delivery in the past, many distribution center managers have not kept on top of training and best practices to achieve optimal efficiency or even maintain design efficiency. Many decisions on capital improvements and spending in the recent past were made to meet immediate business goals, and they were not always fully evaluated to understand the long term impact around flexibility and best practices.
As demand has slowed and customer requirements are being re-evaluated, distribution operations must now be scrutinized and realign their operating practices with requirements to achieve effective and efficient operations.
Distribution centers almost always have the potential for expense reductions and efficiency gains. With the present economic slowdown, now is the time to correct the bad habits and rushed decisions of yesterday.
Jim:
Thank you Brian. I'm really excited about this series, and I really appreciate your input today.
I look forward to our next segment in this global supply chain series on cost reduction, as we focus in on material handling systems.
